Sunday, November 11, 2007

Another Selloff Helps Stocks Put In One Of Their Worst Weeks In Five Years; The Time To Be Long Has Passed

Subscribers to this site definitely were not caught by surprise when it comes to the selloff we have had the past three days. After Tuesday's market session I ended up with a TON of strong CANSLIM quality longs that appeared to signal that the market was ready for another leg up. However, the very next day, stocks reversed hard on heavier volume and many of the new buys were left looking quite mediocre. That particular action was very bearish to me and caused me to pen this right after the closing bell on Wednesday:

Screw This Market; Nasty Selloff After Such A Strong Day Is A Clear Topping Signal

November 7, 2007

I am losing my bullish bias. All my hard work yesterday was rewarded with this!!! Screw this market. Sell all laggards, cut your losses in stocks not working, take in some profits, and raise cash. This market is in for some rough times. Even if it turns around I don’t care anymore. The easy money is being made on the short side now. It is time to get rid of the bullish bias. This is the most confusing market I have EVER seen. Since 1996 I have never seen a market so screwy. Get out of your new longs and take profits. It is time to start selling. If there is nothing wrong with your longs, keep holding.

What makes all of this worse is that today I just loaded up on FNDT in my IRA. This is now the third buy in a row I have made in my IRA that has been a loser (SNDA, BLL, and now FNDT). Right now, I freaking suck, so it is best to not follow my trades unless you really like them. The easy money off the August lows has come and gone. I don’t know what the market is going to do next (probably goes lower) and with all of this volatility I do not want to be a part of it.

I have never seen such a freaking crazy market. The 2000 top has NOTHING on this wild action. If we are not topping, then damn it I really have lost all ability to read the market. Right now, it is unreadable. Anyone bullish or bearish is just asking to get punched in the face. I will continue to take both longs and shorts and will keep everything 1% or smaller of my initial equity.

I am so upset words can not even express how upset I am. Screw this market!!! Have a great evening. Aloha!

I was upset at the time because I felt like it was possible the market was going to rally hard the very next day offering up new longs. Thankfully, the caution that I suggested was rewarded as the Nasdaq sold off 4.4% the past two days. For those that listened to me and took money off the table, way to go. We missed out on some major carnage.

Now my style now forces me to hold at least 10-20% of a long all the way until it closes below the 200 dma (that is why I am still long ZNH even though I KNOW it has topped). The reason I do that is because I have been stopped out of a TON of big winners by not waiting for this event to happen. I am bringing this up because even though I am still long over 100 stocks, it is only because they are above key support and the 200 day moving average. There are about 25% of stocks in my portfolio that if I traded my old style would be complete sells. It would save me money to cut them now, I am sure. But like I just said, I guarantee, my returns would not be as strong if I did not adhere to this rule. I would have been out of MA, IHS, and many other stocks that I am instead enjoying large gains in. I have missed out on too many huge winners to not adhere by this rule.

But, if you are in a stock that no longer posses a green chart with a strong uptrend, you should probably get out of it. This market has definitely changed and this selloff is MUCH different than the rest. This is the first selloff where there is no safe haven. They have finally gotten to ALL of the leaders. There was only one group, come Friday, that did not suffer any selling, and thanks to the exhaustion gap following great earnings (earnings always look the BEST AT THE TOP) FSLR put in, it is probably safe to say that group is done. When I look at the angle of ascent of FSLR, JASO, and SPWR and then see the island reversals in all three stocks it becomes clear that these stocks now look like they have topped.

JASO is the best example of this. After a large uptrend the stock makes its biggest one day move on Thursday by putting in an exhaustion gap off of FSLR earnings. Then the very next day, it gaps lower on its largest volume ever, losing more than it gained on the gap higher, and BOP went red. This is very ugly action after such a bullish previous day. This was the last sub-sector that was holding up in the market. Now they have gotten these too.

The day before was the first day we officially saw all four leading stocks of this five-year bull market all selloff on strong volume the same day. When you look at the strong volume of the selling in all of these stocks, you can see that there have been very few days where we have seen back-to-back days of selling like this in all of our leaders. What makes this even more evident that the leaders are topping is the fact that the fifth and sixth horseman have problems too (GRMN and FSLR).

FSLR's action the past three days confirms the poor action in the leaders with everything I just listed above with the solars. But the first official leader of the bull market that started October 2002 was GRMN. Anyone who has been following GRMN recently knows that the stock has more than likely put in a real top and if you are still holding on to any shares I hope it is only 20% or less as the volume and follow-through selling after a five year bull market simply can't be ignored. This stock has topped. All of our leaders have topped. Now the next step is waiting for an area to short.

Before I go over where I want to short these leaders, first I think it is important for you all to understand why these stocks may be topping. If you look at a chart of BIDU going back to 2005 on an arithmetic chart, you will notice that the stock has pretty much been a very tight stock trending higher until early/mid October where it had its first huge volume selloff. That was the first warning that real dumping was occurring. Then after an extreme rally, the stock has rolled over on heavy volume the past two days. What this stock currently has going for it is that the stock is still above the 50 day moving average. But by looking at the recent distribution in the chart and noticing the very wide trading range recently appearing, it appears the stock is done. With the market already under distribution it isn't going to shock me when this leader falls.

RIMM is the same way since the 2002 lows as it has been in a steady uptrend. Around June this year, the uptrend starting to move at a more exponential slope and along the way RIMM did an excessive 3 for 1 split. After that, the stock rallied on lower volume (not bullish) and then had a breakout (could be exhaustion) gap on huge volume. Since the gap in June was the breakout, this is possibly an exhaustion. The rally that followed the gap was also on lower volume and now the past two days the stock has sold off on heavy volume. The two day decline of 14% on large volume is the most severe selling the stock has seen since its rally started and is a clear sign that there is not much left in this former leader. The good news, like BIDU is that it is above the 50 day moving average. So if you are long there is no reason to sell all of it but if you have not locked in any profits you better do so.

The worst looking of the leaders on the short term is GOOG. GOOG's 9% drop the past two days has come on very large volume and when you combine the two days of selling it is the heaviest volume since March 2006. If you look at a two day chart on an arithmetic scale you can see the drop is the most severe drop the stock has seen since it started trading and the drop looks very nasty on the chart. The long uptrend line from September has now been broken on huge volume which is a clear profit taking signal. Just like the other leaders this stock remains above the 50 day moving average but it too is so weak in the short term that it would not surprise me if we go right through that line. However, if you are still long some, keep holding. Until the 200 day moving average is broken there is no reason to get out of all your GOOG long.

The last leader that is holding up is AAPL. Once again, a two day chart shows the severity of the 11% drop the past two days as the candlestick bar is much longer than anything else you can see on this chart. This stock started to get roughed up in August as it had a LOT of selling hit the stock but back then the stock found strong intraday support on most of the days that the heavy selling hit it. That caused it to rally off the lows to the November highs. The problem with the rally is that the majority of it was done on lower volume. That indicated that the retail crowd was the only crowd interest in buying it up here. That low volume rally has now been met by heavy volume selling, just like most low volume rallies are. This stock is resting on the 50 day moving average and looks the weakest out of all the leaders. If you have not taken profits on this stock, you better take some profits on this one. However, until it closes below the 200 dma, I don't think you should sell all of it.

The only leader that has broken is GRMN. I am using GRMN as an example for the rest of the leaders in what I want to see before I go short. Because shorting leading stocks before they are ready to be shorted leaves you in massive pain. Just ask all the short sellers of these leading stocks in February and August. I am sure they are still feeling that pain. I know many traders who shorted some of these leaders both in February and July/August. Both times they felt it. Some think shorting GRMN right here is the right play now. I still don't think that is the case. GRMN still hasn't failed the 200 day moving average so it is still possible it could bounce here and break through the 50 day moving average and go on to new highs. While I doubt that will happen, I will tell you what I would like to see happen so that I can short this stock.

I would like to see GRMN touch the 200 day moving average and begin a rally to the downtrending 50 day moving average (if you look at the average, you will see it has turned lower). I would then like to see it bounce around the 50 day moving average for a while and/or rally above it and break back down below it. Then I will wait for a high volume selloff around the 50 and 200 day moving average. If you look at the stock DNB, you will see what I would love to see GRMN do. If GRMN breaks down just like DNB did in the middle of October, I will load up in GRMN. The other reason that I would load up is that if GRMN ends up looking like DNB, we can guarantee that the market will be still selling off like it has been recently. There has been a ton of distribution in the stock market the past few months and if the leaders start selling off I truly doubt volume will be low.

Even though I was getting bearish on Wednesday, I have to admit I still wasn't ready to abandon the bull case, as I know that it is hard to stop bullish momentum. But there were two stocks on Thursday that gave me "hope" that the bull was going to continue. One was the stock you read about earlier called FNDT. The other one was EXLS.

FNDT was not a perfect chart at all as the stock did not have two straight months of max BOP. But it did the second best thing which is to bounce off the 50 day moving average, put in a very bullish intraday reversal, breakout to or near recent highs on extremely strong volume, and do it with BOP going max green. Well FNDT did the latter and three days later was looking great as the stock was breaking out to new highs and closing at its HOD with BOP still max green. So obviously the stock deserved to be in my IRA. I only put what I consider the best looking charts in there. I have to admit I normally want a lot more max green BOP but I was getting very trigger happy in this market as the lack of perfect charts was driving me crazy.

But the stock market slapped me right in my face the very next day as it slammed FNDT almost 3%. That was enough to officially kill the beautiful chart. Well it was still beautiful but the chances of failure rose. And sure enough come Friday the stock closed below the 50 day moving average on heavy volume a clear signal to sell almost all of it. I am now holding 25% in my regular accounts since I went long on 11/1. But the buy in my IRA on 11/6 has been completely sold. So that now makes the last three longs in my IRA all losers. And with FNDT failing (it had such a nice chart and extremely strong fundies with good estimates) it was one of my last hopes that this bull market was not over finally being destroyed. As this five year bull market appears to be ending, I am slowly coming to the acceptance that it is over.

My final hope that the bull market was not over yet came on Thursday night as I did my scans. I happened to come across a stock that had a 99 EPS rating and had some great fundamentals overall once I started to delve deeper into this stocks story. Not only were the fundamentals incredible for EXLS the chart was very long and the right side seemed very sound with the slight accumulation and green BOP spread about. The best thing about the chart seemed to be that the RS line was leading the price into new high grounds by such a great margin that if the market was putting in lows (which I was not sure if it was or not because the leaders were just cracking and I was not sure a short-term oversold rally was going to happen or not) this stock would explode higher. So I even went long quite a bit despite the weak market because this stock looked so good.

But proving once and for all that being long is now completely wrong, the stock gapped slightly and sold off all day long ending just slightly off its LOD. Just like FNDT, this was a complete sale as it immediately reversed the breakout. Now since I follow my rules hardcore, I still own 20% of this long for my accounts and 25% in the Conservative CANSLIM port on our website since it did not close below the 50 day moving average/24.71 level. But back in the old days I would definitely have sold it all by now and I recommend that if you have a smaller portfolio that you sell all of it. This stock was so pretty on Thursday, despite the nasty market selloff. If this stock would have rallied off of an oversold bounce the gains would have been great and might have produced a great stock. In a bull market this chart pattern in a stock with this kind of fundamental power in EPS and sales growth would produce 80% plus gains (80% is the move off the closing lows in July to the highs in November). However, a stock that fails this kind of super strong nice pattern is definitely in the wrong market environment. Sadly, for the stock, it takes a perfectly amazing pattern that would have rocked in a bull market and throws it the ground and kicks it in the gut. How rude!!

Is it possible that the market could put in a huge bullish reversal on Monday and then give us a follow-through day four days later? Of course it is. Anything can happen in the stock market. That is why you must never marry the bullish or bearish side. You must always stay flexible. I will tell you this though, if we do get a follow through in the next five days, it is going to take months to produce hot charts. There are very few charts that look like NYX. And before NYX becomes a new long it is going to need to move sideways to slightly higher a bit longer as it is still too deep in its basing pattern from the November 2006 highs.

Some of the reasons why I personally think that we will not bottom any time too soon is because no matter how many people say that there is fear out there I do not see it. I did see that the AAII bear ratio hit 50% which is high but I have seen the Investors Intelligence numbers recently and I believe that is at 22% right now. At the lows in August it was 35% bears and 45% bulls. With the bulls also at 55% right now, I doubt we are at the lows right here. Even at the February lows the bears hit 30% so I am not sure how there can be too much fear in the market right now. On the site I see 35% are bullish and 41% are bearish. In August the bears hit 60% and the bulls hit less than 25% so this bull/bear survey is off the bottom mark too.

But the most important sentiment indicators, imo, are the ones where actual money is put on the line. In that case, the put/call ratio is always one of my favorites to look at. One of the most interesting things I saw this week was that on Wednesday when the market sold off the put/call went from .96 to .90 CLEARLY signaling that there was absolutely no panic put buying during the selloff. That was another bearish warning that something bad was coming. Well on Thursday the ratio spiked up to 1.10. But then on Friday with the Nasdaq falling 2.5% and the IBD 100 falling 3.2% the put/call ratio actually fell from 1.10 to 1.03!! It is simply stunning that an index can selloff 2.5% and the options players bet against the trend and buy the dips since that is what they have been used to since October 2002. The put/call ratio dropping two of three down days this week despite the selloff is the most clear indication that there is no fear out there in actual market players.

The last place to look for fear is the VIX index. The VIX did increase 33% the past three days and that is a major development but just as there was no real fear in the selling in February there is no real fear in this selling right now either. The lows in August were put in once VIX got over 35. What proves my point that the big money is made with a high VIX, the rally that followed produced many brand new longs that made 25-100% gains in three months or less. If the VIX would have gotten over 50, we would have had a ton of 50%-200% gainers. That is how the VIX works. The higher the VIX the more money we make in our longs. The higher the VIX the worse the selloff is to give us fewer stocks to focus on. The few stocks that produce hot pretty green charts always become our new longs that give us huge fast gains.

Right now, the VIX is at 28.50 and until the VIX gets to 35 there is no way that we can even begin to talk about a market that is too oversold and needs to bounce because the market has gotten too bearish too fast. No matter what the talking fundamentalist blind-traders say on CNBC, you must follow your charts and listen to their silent voices. The charts speak louder and more truth than any analyst on TV or on the radio ever will. Those who told me to buy banks all the way down the past few months could have saved their clients a bunch of money if they would have learned to use charts. God bless Don Worden and his TC2007. I don't know what I would do without it. Without it, I wonder if there even would be any stock market commentary by me. This is the greatest way to make a living. Definitely one of the hardest. But still one of the best ways to make an honest dollar!

Aloha and I will see you in the chat room where no matter what market direction we are in we always stay in control and make money (except for this week--it sure was painful; ouch!). ALOHA!!!!

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